1944 Tax Foundation Report Foreshadows Social Security Insolvency

In 1944, less than a decade after the enactment of Social Security, the Tax Foundation issued a dire report on the system’s finances – specifically warning about the false sense of security of allowing balances to accrue in the so-called trust fund.

“[T]he theory of a reserve is illusory,” Tax Foundation analysts wrote. “Insofar as the reserve consists of special, non-negotiable obligations, the process of paying interest theron is a pure bookkeeping transaction, involving no appropriation of tax receipts for the purpose. Interest accruals for the year are merely covered by a sufficient quantity of the special obligations which are added to the total principle of the fund. But when the fund assets are liquidated through conversion into a negotiable security held by the public, then the interest accrual will become an item of real cost to be met by increased taxes.”

Flash forward nearly 70 years to the most recent annual report of the trustees of the Social Security system. The trustees announced yesterday that because of the economy’s slow growth, the program’s trust fund will be depleted in 2033, three years earlier than what was projected last year. But, the truth is that the Social Security system is already effectively broke, at least in the terms generally understood by business owners and average citizens – its expenses exceed its income.

The trustees report does acknowledge that the Disability Insurance (DI) portion of the program and the Health Insurance (HI) portion of the program are spending more than they take in. However, they still maintain the fiction that the basic retirement portion of the program – OASI (Old-Age and Survivors Insurance) – is above water, albeit only because it is drawing down from the interest in the trust fund.

As can be seen in the table below, on a cash basis, outlays for benefits well exceed the actual payroll tax revenues coming into the program. While this is in large measure due to the payroll tax holiday, which reduced payroll tax revenues by $112 billion this year, the cash deficit exceeds this missing revenue (and I have omitted the administrative expenses for the program).

The rest of the program’s “income” comes from transfers from the general fund, interest from the trust fund (which ultimately comes from the general fund), and taxes levied on benefits. This is the kind of accounting that led to the demise of Lehman Brothers, which triggered one of the nation’s biggest financial crisis in history, and is causing Europe’s economic upheaval. We should not wait for such a crisis to address Social Security’s insolvency.

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